Malaysia could benefit from a proposed U.S. ban on imports of new Chinese optical transceiver models, as global suppliers expand production outside China to support artificial intelligence (AI) infrastructure, analysts said.

Kenanga Research said in its recent note that it viewed the proposal as incrementally positive for the non-Chinese optical supply chain, particularly established U.S. optical transceiver vendors such as Lumentum, Applied Optoelectronics (AAOI) and Coherent.

As hyperscalers place greater emphasis on supply chain resilience and national security, procurement is likely to continue shifting towards trusted non-Chinese suppliers, the research house noted.

Based on Kenanga’s compilation, Chinese vendors remain the dominant suppliers to major U.S. hyperscalers (likely accounting for more than 50 percent of the optical transceiver market), highlighting the significant scope for market share reallocation should procurement shift towards non-Chinese suppliers.

“While the transition could result in higher procurement costs as customers replace lower-cost Chinese vendors, we believe the strategic priority of securing AI infrastructure is likely to outweigh near term cost considerations,” it said.

Beyond the transceiver vendors themselves, Kenanga believes the more meaningful read-through lies further downstream in the manufacturing supply chain.

Any incremental market share gains by Western optical players would ultimately require additional production capacity, benefiting their contract manufacturing partners, the research house said.

Importantly, it sees this supply chain migration is already underway.

It is noted that over the past several years, leading U.S. optical vendors have progressively diversified manufacturing into Southeast Asia, with Lumentum establishing Thailand as its primary regional manufacturing base and Coherent expanding production in Malaysia.

“We believe the proposed restrictions would reinforce this existing trend, further strengthening Southeast Asia’s position as a trusted manufacturing hub for AI networking and optical communications,” it added.

Hong Leong Investment Bank Research also said in a recent note that the proposal is driving further China+1 supply chain relocation.

In its sector outlook earlier this year, the research house highlighted that Chinese vendors account for more than 50 percent of global optical transceiver supply, with geopolitical decoupling progressively shifting production towards the US, Southeast Asia, and Taiwan.

It is noted that within Southeast Asia, Coherent and Lumentum have established manufacturing footprints and are actively expanding capacity in the region.

“Importantly, the proposed rule targets new models, implying that next-generation 1.6T optical transceivers for the US market could be built or sourced outside China from the outset,

“This increases the strategic importance of trusted-origin manufacturing capacity and could strengthen pricing across the non-China supply chain,” said Hong Leong.

Reuters reported earlier that the Trump administration is preparing a proposal to ban imports of new Chinese optical transceiver models into the United States, with the Federal Communications Commission (FCC) expected to release the measure later this year.

Optical transceivers are essential components that enable high-speed data transmission over fiber-optic networks and are critical to AI data centers and hyperscale cloud infrastructure.

The proposed restrictions are intended to strengthen the security of U.S. AI infrastructure by reducing risks related to data theft, malware and supply chain vulnerabilities associated with Chinese-made networking equipment.

While the proposal is expected to apply to new transceiver models, it remains unclear whether existing products will also be affected.

Reuters reported that the FCC is likely to provide exemptions for non-Chinese suppliers, a move that could accelerate procurement from trusted vendors outside China.

If implemented, the measure would mark another step in Washington’s broader strategy to de-risk critical AI and semiconductor supply chains by reducing reliance on Chinese technology.

According to Kenanga, the policy direction is consistent with the U.S.’ broader strategy to de-risk critical AI infrastructure and reduce reliance on Chinese technology across the supply chain.

It is noted that optical transceivers have become increasingly strategic given their essential role in enabling high-speed connectivity within hyperscale AI data centers.

Based on Reuters’ report, the proposal is specifically aimed at Chinese-origin optical transceivers rather than the broader optical networking ecosystem.

“If implemented, we expect procurement to gradually shift towards established non-Chinese transceiver vendors that already possess the necessary customer qualifications and supply chain approvals, reinforcing the ongoing trend of supply chain diversification,” said the research house.

However, Kenanga noted that it remains unclear what qualifies as a “new” transceiver model, and whether the restrictions will primarily target next-generation products such as 800G, 1.6T, NPO and CPO solutions, which are expected to be the key growth drivers for the optical transceiver industry over the next several years.

It is also unclear whether the measure applies only to products assembled in China, or whether it also covers Chinese-headquartered vendors manufacturing outside China.

The proposal has also yet to clarify whether the restrictions will be limited to complete optical transceiver modules or extended to sub-components, optical engines and manufacturing services.

Given Chinese suppliers currently hold a dominant share of the global optical transceiver market, the speed at which customers can requalify alternative suppliers and shift procurement remains uncertain, said Kenanga.

Hong Leong also said that the proposal remains subject to revision or withdrawal and the final details and criteria will determine the extent of supply chain reallocation.

“That said, we believe even if the proposal does not materialize, the recurring risk of a potential US regulatory ban on Chinese suppliers is itself enough to steer hyperscalers’ procurement toward securing non-Chinese capacity over the medium-to-long term,” said the research house.

Overall, it maintained its overweight stance on the Malaysian technology sector, underpinned by the broadening semiconductor upcycle and sustained earnings momentum.

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